03 May 2007 Europe/Netherlands Equity Research Integrated Telecommunication Services (Telecommunication Services) /
MARKET WEIGHT
KPN
(KPN.AS)INCREASE TARGET PRICE
Still some upside potential
We are reiterating the Outperform rating on KPN and raising our price target to €€13.0 (from €€11.0). The rating is driven by 3 factors—1) execution of KPN’s all-IP strategy; 2) positive revenue and profitability trends at e-plus; and 3) valuation. KPN’s all-IP strategy is progressing well with testing currently taking place in Amsterdam and The Hague. Dutch unbundlers may now have to accept becoming wholesalers of KPN’s VDSL products in the future with less scope for these unbundlers to differentiate on service or price. We believe the move to all-IP could put less pressure on broadband price cuts—a positive for KPN.
At eplus we are forecasting 2007 service revenue growth of around 9% and medium-term EBITDA margins rising to 35% (from 30% now) driven by e-plus’s low-subsidy strategy (targeting the VFM segment through sub-brands) and the recent signing of a network outsourcing deal. In addition, from our experience of trends in Denmark, Finland and Switzerland we could see a rebound in German mobile market growth trends, over the next two years driven by further increases in elasticity.
In our view, the main risk to KPN forecasts is from regulation. The original OPTA proposal to reduce KPN’s Dutch MTR to €€0.055 per minute (from €€0.11 currently) by mid-2008 was rejected. A new decision is expected before 1 July 2007. Within our forecasts we are assuming a worst-case scenario of a cut to €€0.055 by mid-2008 but clearly any delay to or watering down of the new cuts, would provide upside to our Dutch mobile forecasts. On roaming, as stated previously, we believe the risk from roaming regulation is in our forecasts, although this remains uncertain in the absence of company guidance.
Our 2007E EBITDA forecast rises 3.7% due to an increase in our wireline margin from 35.8% to 38.0%, with medium-term EBITDA forecasts broadly unchanged due to lower Dutch mobile EBITDA forecasts from regulation offsetting wireline margin improvement. Our full DCF is €€14.1 (before minority discount) whilst our LBO valuation is €€13.70, suggesting no bid premium in the stock currently. Our price target rises to €€13 representing a pre-bid valuation, but upside could be greater than this if M&A trends in the sector continue.
Share price performance
6 8 10 12
May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 Price Price relative The price relative chart measures performance against the Europe Dow Jones Stoxx index which closed at 428.56 on 02/05/07
On 02/05/07 the spot exchange rate was Eu 0.74 /US$1
Performance over 1M 3M 12M
Absolute (%) -22.6 -15.1 -0.5 Relative (%) -25.9 -19.1 -15.4
Financial and valuation metrics
Year 12/05A 12/06A 12/07E 12/08E
Headline Revenue (Eu m) 11,886 12,047 12,412 12,422
Headline EBITDA (Eu m) 4,724 4,837 4,983 4,915
Net income (Eu m) 1,622.6 1,583.0 1,508.6 1,532.6
CS adj. EPS (Eu) 0.73 0.79 0.80 0.86
ROIC (%) 10.8 10.3 9.7 9.7
P/E (x) 19.0 14.6 15.4 14.3
P/E rel (%) 81.0 83.5 104.6 90.3
EV/EBITDA (x) 7.1 6.9 6.8 6.9
Dividend 2006 (Eu) 0.50 IC (12/07E, Eu m) 15,571.55
Dividend yield (%) 5.4 EV/IC (12/07E, x) 1.7
Net debt (12/07E, Eu m) 9,156.3 Current WACC (12/07E, %) — Net debt/equity (12/07E, %) -4,660.2 Free float (%) 91.0 Book value/share (12/06, Eu) — Number of shares (m) 1,928.55
Rating OUTPERFORM*
Price (02 May 07) 12.35 (Eu) Target price (12M) (from 11.00) 13.00 (Eu) Market cap. (Eu m) 23,818 Enterprise value (Eu m) 32,977
* Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.
KPN (KPN.AS) 2
KPN now consumer focused
KPN has shifted its focus to one that is customer-centric from a product focus. As such its Dutch business is now organized into four new divisions and a new division has been created within the Mobile International business called Mobile Wholesale Netherlands in order to stimulate future growth in wholesale. The Dutch business is now organised into the following divisions:
■ Consumer;
■ Business;
■ Wholesale and operations; and
■ IT Netherlands;
In essence the Dutch retail unit has been absorbed into the Dutch fixed business but with the Dutch wholesale mobile business spun off into the International Mobile Division. The company will continue to report under the old reporting format together with the new format until investors are more familiar with the new reporting lines. In this report we set out our financial forecasts under the old reporting format although we will move to publishing our financial forecasts under the new format in due course.
KPN committed to distribution in absence of acquisitions
KPN remains committed to distributing 100% of its FCF in the absence of any alternative uses of cash and has indicated that it is set to continue with its 50/50 buyback/dividend strategy. We believe (based on discussions with the Credit Suisse credit research team) KPN could maintain leverage at over 3.0x times net debt to EBITDA in order to maintain a credit rating equivalent to at least BBB. This would imply further debt headroom of over €€4bn which we believe gives the company potential M&A options—both “asset-heavy” and “asset-light”.
In our view, potential “asset-heavy” acquisitions that KPN might be interested in considering could include TDC-owned Sunrise in Switzerland following the private-equity acquisition of TDC and the recently sold BITE (Latvian and Lithuanian) mobile assets and potentially ONE in Austria, which recent press reports have stated is back up for sale following the breakdown in talks between owner E.ON and FT in mid-2006. Such acquisitions would allow KPN to expand its mobile footprint and replicate its low-subsidy strategy as seen with e-plus. “Asset-light” opportunities could include the potential launch of MVNO businesses in France, Poland, and Spain, in our view.
All-IP network plan progressing well
Following KPN’s regulatory approval of its all-IP network plan, over the next few years the company plans to spend €€1-1.5bn building a nationwide VDSL network, largely funding it by closing its legacy copper network and selling the majority of its local exchanges. A strong cable presence in the Netherlands is the one reason for the approval being granted. As a result of shutting down the majority of its exchanges, KPN hopes to realise real estate disposal proceeds of up to €€1bn which we discuss in more detail later in this report. As we have highlighted in recent research the all-IP strategy threatens the current business model of the country’s unbundlers who may have to accept becoming wholesalers of KPN’s VDSL products with less scope to differentiate on service or price. In theory, unbundlers could unbundle KPN’s street cabinets but with more than 20,000 street cabinets currently planned this option looks economically unviable based on Analysys research.
on these terms to KPN’s competitors in the coming months, possibly by the end of Q2 2007. Meanwhile, KPN is currently conducting testing on its all IP-network in Amsterdam and The Hague.
Negative wireline trends to continue but in our forecasts
Net line loss showing signs of stabilisationLine loss at KPN is one of the major factors that has negatively impacted the company’s consumer revenue trends (Figure 1). However, over the past two quarters, the negative retail line loss trend has reduced slightly. In Q3 2006 and Q4 2006 we saw a slight reduction in the net loss as an acceleration in naked DSL subscriptions (Figure 3) offset PSTN and ISDN line loss.
Figure 1: KPN historic quarterly retail line loss
Number of lines
Figure 2: KPN wireline retail line loss forecasts
Number of lines -77 -117 -127 -165 -140 -130 -180 -160 -140 -120 -100 -80 -60 -40 -20 0 Q305 Q405 Q106 Q206 Q306 Q406 -347 -567 -433 -317 -269 -233 -209 -166 -600 -500 -400 -300 -200 -100 0
2005 2006 2007E 2008E 2009E 2010E 2011E 2012E
Source: Company data Source: Company data, Credit Suisse estimates In mid 2005, KPN announced the intention to launch a naked DSL/VoIP product. Although
initially targeted at the country’s mobile-only households, KPN is increasingly targeting its full customer base in a move to mitigate net line loss to cable and ULL. With 114,000 naked DSL adds in Q3 and a further acceleration in naked DSL adds in Q4 2006 to 247,000, this strategy appears to be working, although as a result there has been an increasing decline in consumer call minutes on the KPN network (as more PSTN traffic switches to VoIP over DSL).
Figure 3: Naked DSL uptake
000s
Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 2006 2007E 2008E 2009E 2010E
Naked DSL subscribers 0 2 13 73 156 270 517 900 1,050 1,150 1,250
% of total KPN consumer lines
0.0% 0.0% 0.3% 1.5% 3.3% 5.9% 11.6% 22.2% 28.5% 34.1% 40.0%
Source: Company data, Credit Suisse estimates
KPN (KPN.AS) 4
Figure 4: Consumer voice volume trends
Change year on year
-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 '06
Total Minutes - Local - National - Fixed to Mobile - International
Source: Company data
Figure 5: KPN: Year on year traffic volume forecasts (consumer)
KPN Minutes yoy 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E
Internet dial-up -61.6% -50.8% -59.4% -50.0% -25.0% -15.0% -10.0% -5.0% -5.0%
Local -46.8% -8.3% -15.1% -22.0% -22.0% -20.0% -20.1% -20.2% -17.5%
National -62.4% -9.3% -14.5% -20.7% -20.8% -20.9% -21.1% -17.5% -17.5%
Fixed to Mobile -56.2% 1.8% -8.0% -16.1% -16.2% -16.3% -16.5% -13.0% -13.0% International -64.0% -9.8% -16.2% -22.0% -22.0% -22.0% -22.0% -22.0% -22.0%
Total voice (yoy) -53.5% -7.7% -14.3% -21.0% -21.0% -19.8% -19.9% -18.6% -17.0%
Total KPN Fixed Mins (yoy) -56.4% -21.0% -23.0% -23.9% -21.3% -19.5% -19.3% -17.6% -16.0%
Source: Company data, Credit Suisse estimates Headline Broadband pricing trends
Figure 6: KPN DSL pricing assumptions (excluding VoIP and IPTV)
Eu in millions, unless otherwise stated
KPN ISP DSL 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E
- Slim/Time (1000 kbit/s down - 128 kbit/s up)
Speed (kbps) 288 288 1,000 1,000 2,000 2,000 2,000 2,000 2,000
Share of subscriptions 2% 4% 7% 9% 10% 10% 10% 10% 10%
Subs (av. in year) 14 48 124 202 251 264 273 279 284
Monthly charge 15.00 15.00 15.00 15.00 14.63 14.26 13.90 13.56 13.22
Change 0% 0% 0% -3% -3% -3% -3% -3%
Revenues 3 9 22 36 44 45 46 45 45
- % Go (1500 kbit/s down - 256 kbit/s up)
Speed (kbps) 416 800 1,500 2,000 4,000 6,000 6,000 8,000 8,000
Share of subscriptions 23% 35% 47% 50% 50% 50% 50% 50% 50%
Subs (av. in year) 161 424 829 1,124 1,257 1,318 1,365 1,397 1,421
Monthly charge 18.45 18.45 18.45 18.45 18.45 18.45 18.45 18.45 18.45
Change 0% 0% 0% 0% 0% 0% 0% 0%
Revenues 36 94 184 249 278 292 302 309 315
- % Lite (1,600 kbit/s down - 512 kbit/s up)
Speed (kbps) 1,120 1,600 1,600 2,200 6,000 8,000 8,000 8,000 10,000
Share of subscriptions 49% 42% 34% 30% 30% 30% 30% 30% 30%
Subs (av. in year) 344 508 600 675 754 791 819 838 853
Monthly charge 25.17 25.17 25.17 25.17 25.17 25.17 25.17 25.17 25.17
Change 0% 0% 0% 0% 0% 0% 0% 0%
Revenues 104 154 181 204 228 239 247 253 258
- % Basic (3,200 kbit/s down - 768 kbit/s up)
Speed (kbps) 2,240 3,200 3,200 4,000 6,000 8,000 12,000 16,000 16,000
Share of subscriptions 23% 16% 10% 9% 8% 8% 8% 8% 8%
Subs (av. in year) 161 194 176 202 201 211 218 223 227
Monthly charge 41.97 41.97 41.97 41.97 40.92 39.90 38.90 37.93 36.98
Change 0% 0% 0% -3% -3% -3% -3% -3%
Revenues 81 98 89 102 99 101 102 102 101
- % Extra (8,000 kbit/s down - 1,024 kbit/s up)
Speed (kbps) 4,480 8,000 8,000 12,000 16,000 16,000 20,000 32,000 32,000
Share of subscriptions 3% 3% 2% 2% 2% 2% 2% 2% 2%
Subs (av. in year) 21 36 35 45 50 53 55 56 57
Monthly charge 62.98 62.98 62.98 62.98 61.41 59.87 58.37 56.91 55.49
Change 0% 0% 0% -3% -3% -3% -3% -3%
Revenues 16 27 27 34 37 38 38 38 38
Total retail broadband revenues 239 381 503 625 686 715 735 748 756
Implied BB ARPU 28.4 26.2 23.7 23.2 22.7 22.6 22.4 22.3 22.2
Change YoY -7.7% -9.5% -2.4% -1.8% -0.7% -0.6% -0.6% -0.6%
Source: Company data, Credit Suisse estimates IPTV launched in February
KPN (KPN.AS) 6 Triple-play access pricing comparison
In Figure 7 we set out a comparison of triple-play access pricing (no voice call charges included) in the Dutch broadband market. Assuming that KPN’s IPTV product represents the best comparison with the cable operators in terms of number of channels offered then on a 1.5MBps/2MBps triple play offering KPN is charging around €€54.90 per month inc. VAT compared to the cable operator, UPC at around €€50. It is interesting that KPN is even addressing the “Value-for-money” segment by offering a low cost triple play access offering for €€27.90 under its HetNet brand which offers the user broadband/VoIP access at off-peak times only.
Figure 7: Triple play access pricing for equivalent 2MBps line
Eu in millions, unless otherwise stated
Broadband VoIP DVB-T IPTV Cable TV Triple-play access
KPN (InternetPlus) Go* 34.95 7.95 42.9
KPN (InternetPlus) Go* 34.95 19.95 54.9
KPN (HetNet) ** 19.95 7.95 27.9
UPC (42 TV channels) 29.95 17.99 47.9
UPC (100 TV channels) 29.95 19.99 49.9
Tele2 Neths (40 channels) 29.95 7.95 37.9
Tele2 Neths (70 channels) 29.95 14.95 44.9
Source: Company data. All prices include VAT and exclude promotions.
* Bundle represents around a €€5 saving on standalone monthly line rental plus Go DSL package. ** DSL/VoIP access only available at certain time representing "Value-for-money" offering
Negative wireline revenue trends in our forecasts
In conclusion we believe that our consumer wireline revenue forecasts set out in Figure 9
contain suitably conservative assumptions on line loss and consumer volume trends while we believe standalone broadband pricing can remain stable going forward with KPN placing a greater emphasis on bundled triple-play products going forward following KPN’s recent IPTV launch. We forecast voice access revenues to fall 21% in 2007 and around 15-18% from 2008, voice traffic revenues to fall 19% in 2007 and decline 15%-19% in 2008-10E. Consumer Internet (DSL and Naked DSL) revenues we see growing 4% in 2007 and 2008 (boosted by the acquisition of Tiscali Neths) while other revenue (including IPTV) forecasts grow by 50% in 2007 and 25% in 2008 from €€61m in 2006.
Figure 8: Consumer revenue forecasts
Eu in millions, unless otherwise stated
Fixed Division - revenues 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E
Consumer Voice access 1,031 892 707 579 496 428 366 311 yoy% -6% -13% -21% -18% -14% -14% -14% -15% Voice traffic 643 571 463 377 313 264 231 206 yoy% -3% -11% -19% -19% -17% -15% -13% -11% Voice total 1,674 1,463 1,171 956 809 692 597 518 yoy% -5% -13% -20% -18% -15% -14% -14% -13% Internet (DSL&Naked DSL) 699 738 898 1,035 1,086 1,118 1,141 1,158 yoy% 4% 4% 4% 4% 2% 1% 1% 1%
Other (including IPTV) 11 61 92 114 126 138 152 167
yoy% 450% 455% 50% 25% 10% 10% 10% 10%
Total Consumer revenues 2,384 2,262 2,160 2,105 2,020 1,949 1,890 1,843
yoy% -2.4% -5.1% -4.5% -2.5% -4.0% -3.5% -3.0% -2.5%
Figure 9: KPN wireline forecasts
Eu in millions, unless otherwise stated
Fixed Division - P&L 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
REVENUES Consumer Voice total 1,674 1,463 1,171 956 809 692 597 518 454 401 352 yoy% -5% -13% -20% -18% -15% -14% -14% -13% -12% -12% -12% Internet 699 738 898 1,035 1,086 1,118 1,141 1,158 1,169 1,178 1,186 yoy% 4% 4% 4% 4% 2% 1% 1% 1% 101% 201% 301% Other 11 61 92 114 126 138 152 167 184 203 223 yoy% 450% 455% 50% 25% 10% 10% 10% 10% 10% 10% 10% Total Consumer 2,384 2,262 2,160 2,105 2,020 1,949 1,890 1,843 1,807 1,781 1,761 yoy% -2.4% -5.1% -4.5% -2.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.4% -1.2% Business Voice 1,238 1,086 953 836 733 643 564 495 434 381 334 Connectivity 736 696 675 655 635 616 598 580 562 545 529 IMS 410 417 434 451 465 478 493 508 523 539 555 Entercom 406 436 458 481 505 530 556 584 613 644 676 Other -137 -105 -89 -85 -85 -85 -85 -85 -85 -85 -85 Total Business 2,653 2,530 2,430 2,337 2,253 2,183 2,126 2,082 2,048 2,024 2,009 yoy% -10.0% -4.6% -4.0% -3.8% -3.6% -3.1% -2.6% -2.1% -1.6% -1.2% -0.7%
Wholesale and ops
Carrier Services 4,182 3,962 4,062 4,062 3,960 3,861 3,764 3,670 3,579 3,489 3,402 yoy% -5% -5% 3% 0% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% Other 1,429 1,379 1,345 1,311 1,278 1,246 1,215 1,185 1,155 1,126 1,098 yoy% -2% -4% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% Intercompany within wholesale -626 -612 -606 -606 -606 -606 -606 -606 -606 -606 -606 yoy% 4% -2% -1% 0% 0% 0% 0% 0% 0% 0% 0%
Total wholesale and ops 4,985 4,729 4,800 4,766 4,632 4,501 4,373 4,249 4,127 4,009 3,894
yoy% -5.2% -5.1% 1.5% -0.7% -2.8% -2.8% -2.8% -2.8% -2.9% -2.9% -2.9%
Other -3,139 -2,913 -2,800 -2,691 -2,616 -2,542 -2,470 -2,399 -2,331 -2,264 -2,199
yoy% -8% -7% -4% -4% -3% -3% -3% -3% -3% -3% -3%
Total Fixed Revenues 6,883 6,608 6,590 6,518 6,290 6,091 5,920 5,774 5,652 5,551 5,465
yoy% -5.1% -4.0% -0.3% -1.1% -3.5% -3.2% -2.8% -2.5% -2.1% -1.8% -1.5% EBITDA Consumer 380 269 257 250 240 232 225 219 215 212 209 yoy% -4% -29% -5% -3% -4% -4% -3% -3% -2% -1% -1% margin % 15.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% Business 358 349 335 316 304 295 287 281 276 273 271 margin % 13.5% 13.8% 13.8% 13.5% 13.5% 13.5% 13.5% 13.5% 13.5% 13.5% 13.5% Wholesale and ops 2,038 1,928 1872 1811 1737 1688 1640 1593 1548 1503 1460
yoy% -10% -5% -3% -3% -4% -3% -3% -3% -3% -3% -3%
margin % 40.9% 40.8% 39.0% 38.0% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5%
Other 16 28 42 53 58 64 70 77 85 93 102
yoy% 78% 75% 50% 25% 10% 10% 10% 10% 10% 10% 10%
Total Fixed EBITDA 2,792 2,574 2,506 2,430 2,339 2,278 2,222 2,170 2,124 2,082 2,043
yoy% -10.5% -7.8% -2.6% -3.1% -3.7% -2.6% -2% -2% -2% -2% -2%
KPN (KPN.AS) 8
Dutch mobile consolidation remains a possibility
There have been widespread press reports that FT’s Orange Netherlands operation is up for sale—FT has stated publicly that it is reviewing its position in the Netherlands. Dutch newspaper Het Financieele Dagblad reported in February that were are five interested parties interested in buying Orange Netherlands, citing DT as the front-runner, but adding that Liberty Global (which owns the leading Dutch cable operator), Cinven (owner of other cable operators), Warburg Pincus, Vodafone and a consortium of Rabo Capital, Providence and Carlyle were also interested. Les Echos reported last week that DT and Providence were now the front-runners.
DT's Dutch business lacks scale (market share of 17% and EBITDA margins of around 14%) so combining it with Orange Neths (gaining a combined market share of around 27%) would likely increase the margins of the combined business and generate value for DT, in our view. On an LBO model we believe Orange Netherlands could be worth up to €€1.4bn (Figure 10) to a potential private equity bidder. This valuation assumes Orange Netherlands could be sold in three years time for 8.5 times EV/EBITDA. However, we believe that DT could afford to outbid private equity interest due to synergies of combining the two operations.
Implications for KPN
Figure 10: Orange Netherlands LBO valuation: €€1.37bn
Eu in millions, unless otherwise stated
Orange Netherlands LBO
Last updated: 30/04/07Eu m 2008E 2009E 2010E 2011E 2012E 2013E
Net Revenues 636 649 662 675 688 701 Sale Price Inputs
EBITDA Sale EV/EBITDA of:
Orange Neth 153 162 166 169 172 175 Implied entry multiple for core assets 9.0x
Group EBITDA 153 162 166 169 172 175 Exit multiple for core assets 8.5x
Group EBITDA margin 24.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Capital Structure Inputs
Core asset costs 483 487 497 506 516 526
Reduction to core assets costs 0.0% 2.0% 2.0% 2.0% 2.0% 2.0% Total Amount Paid 1,368
Group EBITDA with improvement 153 172 175 179 182 186 EV/EBITDA Price Paid 9.0x
24.0% 26.5% 26.5% 26.5% 26.5% 26.5% Debt on acquisition 0
y y y y Professional fees 10
Group EBITDA in scenario 153 172 175 179 182 186 Debt 70% 958
Group EBITDA margin in scenario 24.0% 26.5% 26.5% 26.5% 26.5% 26.5% Equity 30% 410 Stake to be acquired 100%
Capex
Orange Neth -76 -78 -79 -81 -83 -84 Debt
Group Capex -76 -78 -79 -81 -83 -84 Senior Debt A 65% 622
Group Capex/Sales -12.0% -12.0% -12.0% -12.0% -12.0% -12.0% Senior Debt B 15% 144 Improvement to Capex 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Subordinated Debt 20% 192
Group Capex with improvement (76) (78) (79) (81) (83) (84) Total (Check) 100% 958
Group Capex in scenario (76) (78) (79) (81) (83) (84) Equity
Group Capex/Sales in scenario -12.0% -12.0% -12.0% -12.0% -12.0% -12.0% Shareholders Loans 50% 205
Normal Equity 50% 205
EBITDA - Capex 76 94 96 98 100 102
Base Rate 4.3%
Tax Cash Due -24 -30 -30 -31 -31 -32
Changes in working capital Interest Rates Premium Rate
Other operational cashflows Senior Debt A 2.50% 6.80%
Senior Debt B 6.00% 10.30%
FCF (pre-interest) 52 64 66 67 68 70 Senior Debt blended rate 3.16% 7.46%
Subordinated Debt 6.75%
Senior Debt and Second Lien Interest -57 -56 -54 -52 -50 -47 Shareholders Loans 7.00%
Subordinated Debt -13 -13 -13 -13 -13 -13
Cash interest -70 -69 -67 -65 -63 -60 Debt/EBITDA
Non-cash interest (Shareholders Funds) -7 -15 -16 -17 -18 -19 Debt/EBITDA end 2008E 6.2x Debt/EBITDA end 2009E 5.4x
Tax Shield 24 26 26 26 26 25 Debt/EBITDA end 2010E 5.2x
FCF (post-interest) 7 22 25 28 31 34 IRR of cashflows 20.0%
Source: Credit Suisse estimates
Dutch MTR decision expected before 1 July
Last summer, OPTA announced a two-year plan to halve mobile termination rates in the Netherlands. KPN estimate that a 50% cut would negatively impact KPN Mobile Netherlands revenues by around €€80m and negatively impact EBITDA by €€40m.
KPN (KPN.AS) 10 We set our ARPU forecasts for KPN Mobile Netherlands in Figure 12. We forecast KPN
Netherlands ARPU to fall 4.4% year on year in 2007E and to fall 8.5% in 2008E. This follows a year on year decline of 3.3% in 2006 following a 15% termination rate cut in Q4 2005 and the integration of Telfort in Q4 2005. Within our ARPU model we have assumed roaming cuts are implemented as set out in more detail later in this report and a worst-case decision on an announced MTR cut—we assume that OPTA imposes cuts of around 30% from both 1 July 2007 and 1 July 2008 in order to bring down KPN’s MTR to €€0.055 by 1 July 2008 i.e. the original proposal. We see upside to our KPN mobile Neths forecasts on a delayed or watered down proposal. Our year on year growth forecasts for KPN Mobile Neths service revenues are 2.7% and minus 5.2% in 2007E and 2008E, respectively.
ARPU was down 6.3% year on year in Q3 2006 compared to down 3.3% in Q2 2006 and flat year on year in Q1 (Figure 11). However, despite this Q4 2006 blended ARPU was flat as the year on year comparison was not effected by the Q4 2005 termination rate cut.
Figure 11: KPN Netherlands quarterly ARPU
euros, unless otherwise stated
Quarterly ARPU KPN Neths
Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06
ARPU 28.0 30.0 32.0 29.0 28.0 29.0 30.0 29.0
Change YoY 0.0% -3.3% -6.3% 0.0%
Source: Company data
Figure 12: KPN Mobile Netherlands: Detailed ARPU model
Euros unless otherwise stated
Blended ARPU 2005A 2006A 2007F 2008F 2009F 2010F
Blended ARPU 30.0 29.0 27.7 25.4 24.7 24.6
Change -6.3% -3.3% -4.4% -8.5% -2.8% -0.2%
Data revenue 4.2 4.6 5.0 5.1 5.4 5.9
% from data 14.0% 16.0% 18.0% 20.0% 22.0% 24.0%
Voice ARPU 25.8 24.4 22.7 20.3 19.2 18.7
Blended total voice MOU 123 132 144 158 174 189
Rev/minute 0.21 0.18 0.16 0.13 0.11 0.10
Roaming revenue 3.0 2.9 2.2 1.4 1.4 1.4
% roaming total ARPU 10.0% 10.0%
Roaming minutes per month 3.0 2.9 2.8 2.8 3.0 3.2
Roaming rev/min 1.00 1.00 0.78 0.49 0.47 0.45
Of which...
Customer Outgoing 2.1 2.0 1.7 1.2 1.2 1.2
% Total roaming 70.0% 70.0%
Revenue per minute 1.00 1.00 0.73 0.45 0.43 0.41
Change in price -27.5% -37.9% -5.0% -5.0%
Minutes 2.1 2.0 2.3 2.6 2.8 2.9
Organic growth 2.5% 2.5% 2.5% 2.5%
Price driven growth 11.7% 9.5% 3.0% 4.0%
Blended Elasticity 0.43 0.25 0.60 0.80 Customer incoming 0.9 0.9 0.5 0.2 0.2 0.2 % Total roaming 30.0% 30.0% Rev/minute 0.80 0.80 0.48 0.20 0.20 0.20 Change -39.7% -58.5% 0.0% 0.0% Minutes 1.1 1.1 1.1 1.1 1.1 1.1 Termination revenues 4.5 3.9 3.4 2.4 2.1 2.1
% termination voice ARPU 17.5% 15.0% 14.7% 12.0% 10.8% 11.3%
Termination minutes 35.0 35.0 35.9 36.8 37.7 38.6
Organic/cyclical factors 2.5% 2.5% 2.5% 2.5%
Termination rate (per min) 0.129 0.110 0.094 0.066 0.055 0.055 Change in termination rate -16.2% -14.7% -15.0% -29.4% -16.7% 0.0%
Outbound revenue 18.3 17.6 17.2 16.5 15.8 15.2
% outbound of voice 70.9% 72.3%
Outbound minutes per month 85.0 94.1 104.9 118.5 133.4 146.7
Growth 3.9% 10.7% 11.5% 12.9% 12.6% 10.0%
Outbound rev/min 0.22 0.19 0.16 0.14 0.12 0.10
Blended rev/min change -12.5% -15.0% -15.0% -12.5%
Organic/cyclical growth factors 0.0% 0.0% 0.0% 0.0%
Implied elasticity 0.92 0.86 0.84 0.80
KPN (KPN.AS) 12
e-plus targeting double-digit growth in 2007
KPN is targeting double-digit service revenue growth for e-plus in 2007 and believes that a similar level of growth could be maintained beyond 2007. To achieve this e-plus continues to pursue a strategy of targeting value segments, particularly through its sub-brands—e-plus currently has around 4.3m subscribers on these sub-brands which include Simyo, Aldi, BASE and Medion. Future MVNO deals are possible for e-plus (for example with German broadband partners) although KPN believes it would be difficult to see any MVNO deal that would provide the high levels of subscriber take-up that the Aldi sub-brand has delivered so far. The operator continues to offer good value tariffs e.g. BASE flat-fee for €€25 and a homezone tariff.
e-plus outsourcing deal to drive medium-term margins to 35%
In Figure 13 we compare our margin forecasts with other German mobile operators. For Vodafone, T-Mobile and O2 we assume falling 2007E EBITDA margins (FYMar08E for Vodafone and O2) of around 2.5pp and then broadly flat going forward for T-Mobile and Vodafone but rising to 30% in the long-term for O2 Germany as it continues to gain scale. Our forecasts for e-plus for 2007 show the opposite trend with a slight year on year increase in 2007E EBITDA margin by 0.7pp and margins rising 1pp per year from 2008E and peaking at 35%. We believe these forecasts are achievable given e-plus’s low-subsidy strategy in the German mobile market (targeting the “value-for-money” through various sub-brands) and the February 2007 signing of a network operation and maintenance outsourcing deal with Alcatel-Lucent. The company did not comment on potential cost savings from the deal but the Financial Times reported at the time that the NPV of cost savings could be around €€1.5bn. KPN had previously discussed a restructuring of e-plus, and we now include outsourcing in our e-plus forecasts with medium-term EBITDA margins rising to 35% from 31.3% reported in FY2006.
Figure 13: German mobile: EBITDA margin forecasts for all operators
2005 2006 2007E 2008E 2009E 2010E 2011E 2012E
e-plus 24.1% 31.3% 32.0% 33.0% 34.0% 35.0% 35.0% 35.0%
T-Mobile Germany 41.8% 40.2% 37.6% 37.9% 38.1% 38.1% 38.0% 38.0%
Vodafone Germany 47.0% 43.4% 40.8% 41.2% 41.7% 41.8% 41.9%
O2 Germany 22.1% 22.3% 19.5% 23.3% 25.8% 28.4% 30.0% 29.6%
Source: Company data, Credit Suisse estimates
German mobile elasticity to drive rebound in H2 2007
Figure 14: Contract vs. pre-paid price implied elasticity of demand (per SIM) over the last five years in European mobile 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0 50 100 150 200 250
Contract MOU per sub per month
C o nt ra c t ou tb o u nd r e v/ m in ( e u
Contract elasticity c 1.1
elasticity = 1.10 -0.05 0.10 0.15 0.20 0.25 0.30 0 10 20 30 40 50 60 Prepaid MOU per sub per monthP rep ai d out b o u n d r e v /m
Prepaid elasticity <1.0
elasticity = 0.6 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0 50 100 150 200 250Contract MOU per sub per month
C o nt ra c t ou tb o u nd r e v/ m in ( e u
Contract elasticity c 1.1
elasticity = 1.10 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0 50 100 150 200 250Contract MOU per sub per month
C o nt ra c t ou tb o u nd r e v/ m in ( e u
Contract elasticity c 1.1
elasticity = 1.10 -0.05 0.10 0.15 0.20 0.25 0.30 0 10 20 30 40 50 60 Prepaid MOU per sub per monthP rep ai d out b o u n d r e v /m
Prepaid elasticity <1.0
elasticity = 0.6 -0.05 0.10 0.15 0.20 0.25 0.30 0 10 20 30 40 50 60 Prepaid MOU per sub per monthP rep ai d out b o u n d r e v /m
Prepaid elasticity <1.0
elasticity = 0.6Source: Credit Suisse research
KPN (KPN.AS) 14
Figure 15: German mobile price cuts over the past two years
Date Company Contract/
Prepaid
New tariff or offer 2005
01-Jun KPN (e-plus) Prepaid Simyo offers calls to all phones in Germany for a flat €€0.19 per minute. SMS €€0.19 per message. 28-Jul KPN (e-plus) Contract BASE contract tariff launched. SIM-only contract tariff, with a 12-month contract (24 months is standard in
Germany) and no handset subsidy. Monthly fee of €€25 gives unlimited fixed and on-net calls. Calls to other mobile networks are €€0.25 per minute and SMS costs €€0.19 per message. Billing on-line.
02-Aug T-Mobile Prepaid T-Mobile launches web-based SIM-only prepaid offer called "Xtra Click&Go". Calls cost €€0.15 per minute to other T-Mobile customers and €€0.30 per minute to other German mobile networks.
31-Aug Vodafone Contract 2 in 1 upgraded Zuhause homezone product launched. Previously, Zuhause voice customers were taking 2 mobile handsets, one for home at a cheap rate and one for outside. Now upgraded to allow one phone switching seamlessly. Costs €€20/month for extra 1000 minutes of call allowance for calls to fixed line numbers from the homezone. Outside the homezone normal mobile tariffs apply.
02-Sep Vodafone Prepaid Flat rate pre-paid tariff promotion lasting until end January 2006. Costs €€0.39 for the first minute to fixed line or on-net then free afterwards. Costs €€1.50 per month debited from prepaid balance.
21-Sep Vodafone Prepaid Call Ya Compact' online prepaid tariff launched. €€0.15 per minute on-net, €€0.30 per minute to fixed and off-net mobile, SMS €€0.15 per message. Purchase Call Ya Compact for €€ 19.95 on the Internet includes €€10 of free calls.
01-Nov KPN (e-plus) Prepaid Simyo offers calls to all phones in Germany for a flat €€0.16 per minute, €€0.06 to other Simyo. SMS €€0.11 per message.
01-Dec Tchibo Prepaid Lowers prepaid tariff €€0.05 on-net, €€0.25 off net
05-Dec Aldi Prepaid SIM-only offer by Aldi. €€0.15 per minute for peak and off-peak voice.
09-Dec T-Mobile Prepaid Web-based pre-paid tariff cut. Now offering €€0.05 per minute on-net calls from €€0.15 per minute previously and €€0.05 per SMS (from €€0.15 per message previously.
09-Dec Klarmobile Prepaid Klarmobile (MVNO of Mobilcom) cuts its pre-paid tariffs for its SIM-only offer - now offering free calls on-net. 20-Dec Vodafone Prepaid "Call ya Compact" tariffs cut. Cost of an on-net call is now €€0.05 per minute (from €€0.15 per minute) while
off-net calls and fixed calls now cost €€0.25 per minute (from €€0.30 per minute).
2006
11-Jan T-Mobile Contract DT announces new homezone tariff "T-Mobile@Home" offering users cheaper calls from a zone around 2km wide around their home or work. T-Mobile@home costs €€4.95 per month, with no inclusive minutes. Fixed-line number for your mobile. €€0.04 per minute on-net and to fixed when calling within the 2km zone.
23-Aug Vodafone Prepaid "HappyEvening", "HappyWeekend" & "MyCard SMS-Packets" prepay offers launched. HappyWeekend (€€6 allows 1,000 minutes of on-net and fixed calls (Sat and Sun)) and HappyEvening (€€9 offers 1,000 minutes between 8pm and 8am) cards cost €€15.
29-Aug T-Mobile Contract Relax bundles revised - Relax 400 reduced to €€49 pm from €€54 pm. New Relax 1000 tariff for €€59 per month replacing existing €€79 per month Relax 600 tariff.
29-Aug T-Mobile Contract New Max contract tariff. For €€35 pm on-net and fixed calls are free, and on-net text free.
29-Aug T-Mobile Prepaid New Xtra Smart prepaid tariff. If a user tops up at least €€30 per month, for the next month calls to T-Mobile and fixed networks cost €€0.09 per minute while calls to other mobiles will cost €€0.29 per minute. Otherwise, calls are €€0.49 and €€0.29 per minute respectively.
26-Sep Vodafone Contract CombiPackages launched: 60 mins for €€24.95, 120 mins for €€34.95, 240mins for €€49.95, 480 mins for €€69.95 & 1200 mins for €€89.95. Includes minutes to fixed lines, Vodafone's network & to other mobile networks. 26-Sep Vodafone Contract SuperFlat: €€34.95 with SIM only which gives free on-net & calls to fixed line. €€44.95 including a subsidised
phone. Both offered on minimum 24-month contracts.
06-Oct Vodafone Prepaid CallYaComfort prepaid revamp: Calls to Vodafone and fixed line numbers in Germany for as low as 9c/min, depending on how much the customer tops up every month (40% cut). Calls to other German mobile networks fall around 35% to as low as eu29c/min. Option to make free on-net w/e calls on €€15 or more of call credit pcm. 16-Nov O2 Contract Genion tariff structure simplified. Offnet and "outside homezone calls" cut to €€0.19 per minute. €€25 per month
contract tariff launched offering free fixed and on-net calls within Germany.
16-Nov O2 Prepaid Genion prepaid service launched. €€0.03 per minute to fixed line and €€0.19 per minute for other calls.
2007
23-Jan KPN Contract "zehnsation": Under the e-plus brand, and is cheaper than e-plus existing contract tariffs, on our analysis. The new contract tariff cost €€0.10 per minute to any phone, and has a €€10 per month minimum spend. It is also a SIM-only tariff.
15-Mar Vodafone Contract i) A new combined fixed-mobile package (Vodafone At Home, already at 2m users), offering mobile and fixed (voice and DSL) access for €€34.95 for the first 6 months of the contract (€€49.95 thereafter), including flat rate calls to Vodafone mobile phones of friends and family from within a 2km homezone. Also customers can elect to take a DSL only service for €€19.95 per month.
15-Mar Vodafone Contract ii) A Vodafone Zuhause (mobile home zone) package offering unlimited flat rate calls to international numbers for €€10 per month
15-Mar T-Mobile Contract T-Mobile Germany offering unlimited calls to fixed-line numbers and on-net calls for €€25 per month. T-Mobile has also introduced a data plan charging as little as €€0.01 per MB downloaded over a laptop.
This pricing trend towards contract price cutting is what we are seeing in German mobile and, if this trend continues, it is likely that customers will switch back to contract in Germany and mobile usage will increase (TEM has argued in Spain for years that when a customer switches from pre-paid to contract they use the phone around 30% more). This would start to come through in better ARPU year on year trends in Germany over the next 12 months.
To backup this assumption in Figure 16 we show year on year mobile service revenue growth trends for markets that have experienced a price war. From our experience of trends in Denmark, Finland and Switzerland we typically see a rebound in the year on year mobile growth trend around two years after a prepaid price shock (in quarters Q8 or Q9). Following the prepaid price shock in Germany in H2 2005 then we estimate we can expect a rebound in German mobile growth trends in H2 2007, one of the key drivers of our Outperform rating on DT.
Figure 16: Mobile growth after prepaid price shock
(relative to growth = 100% at start of price shock)
-200% -150% -100% -50% 0% 50% 100% 150% Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13
Denmark Finland Switzerland Germany Source: Company data
KPN Base facing price cuts and regulatory pressure
A number of innovative tariffs were launched in the Belgian mobile market in Q1 2007, mainly aiming at stimulating on-net traffic and fixed-to-mobile substitution. We summarise these in Figure 17.
Base launched two new flat-fee tariffs, “3” and “3+” in the quarter with both tariffs offering three hours of free on-net talktime per day for €€25 and €€35 per month, respectively, with “3+” offering calls to a fixed line within the bundle for the extra monthly fee. Base also launched a new prepaid tariff under its “Aldi” low-cost sub-brand offering on-net calls for just €€0.09 per minute and calls to other mobiles for €€0.19 per minute, among the cheapest rates we have seen in the Belgian mobile market.
Mobistar launched its much-anticipated home-zone tariff (“AtHome”) in mid-March offering 40 hours of fixed-line free calls from within the homezone for an additional €€10 per month on top of the customer’s existing tariff. Mobistar also announced it was aligning its prepaid roaming prices with its contract rates in February.
KPN (KPN.AS) 16
Figure 17: Belgian mobile market tariff launches in Q1 2007
2007 Company Market New tariff or offer
23-Jan KPN Belgium Base 3 launched. Flat fee of €€25 (inc. VAT) per month, customers will have 3 hours per day of talktime to BASE numbers only. In addition, customers can send 1,000 text messages a month on-net.
14-Feb Mobistar Belgium New homezone contract tariff called Mobistar "AtHome" from 19 March 2007. The homezone uses the cell-ID from the closest GSM antenna to the customer's home. Mobistar customers who take up this option can call 40 hours from home for just €€10 per month using their mobile phone to any Belgian fixed line and €€0.15 per minute for international calls. Mobile-to-fixed calls in the customer’s homezone will become substantially cheaper although Mobistar has not announced these rates.
21-Feb Aldi Belgium ALDI TALK (BASE Joint venture with Aldi) launched. Prepaid. On-net calls €€0.09 per minute. Off-net calls €€0.19 per minute. Roaming in Europe €€0.49 per minute. Text messages on-net €€0.09 per minute and €€0.19 per minute to any other network.
15-Mar KPN Belgium Base 3+ launched. Flat fee of €€35 (inc. VAT) per month, customers will have 3 hours per day of talktime to BASE numbers and fixed lines. In addition, customers can send 1,000 text messages a month on-net. Calls outside bundle cost: on-net and fixed €€0.05 per minute, €€0.15 per text; off-net €€0.20 per minute, €€0.15per text.
2007 Company Market New tariff or offer
13-Feb Mobistar Belgium Mobistar aligns prepaid roaming tariffs to contract tariffs. Outbound €€1.10 per minute and inbound €€0.40 per minute.
Source: Company data
New Belgian termination rates announced for 2008 and 2009
The Belgian regulator, BIPT, announced an updated glide path for termination rate cuts for all of the operators in April 2007. The rates for all three operators are now more symmetrical following European Commission opposition to the original BIPT proposal announced back in August 2006. BIPT announced last year it would amend its originally proposed glide path so that the termination rates between the different operators became more symmetrical in the near-term.
Figure 18: New BIPT termination rate glide path
Euros
Termination rate cuts (old) 2005 Nov-06 May-07 Jan-08 Jul-08
Proximus 12.66 10.13 8.09 7.48 6.56
Mobistar 15.98 12.75 10.16 9.38 8.21
Base 19.6 15.81 12.76 11.82 10.41
Termination rate cuts (new) 2005 Nov-06 May-07 Jan-08 Jul-08 Jan-09 Jul-09
Proximus 12.66 10.13 8.09 8.03 7.96 7.85 7.73
Mobistar 15.98 12.75 10.16 9.06 7.96 7.85 7.73
Base 19.6 15.81 12.76 10.76 8.75 8.62 8.49
Source: BIPT
The effect on BASE’s revenues and EBITDA in 2008 and 2009 from the latest termination rate cut proposal is largely captured in our forecasts, in our view, We forecast BASE year on year service revenue growth to fall from over 13% in 2006 to 8% in 2007E and just 1.8% in 2008. These service revenue growth rates also assume material roaming rate cuts for BASE as we analyse in more detail later in this report.
EU mobile roaming cuts
generates around 10% of its service revenues from roaming, less than the 15% stated by Mobistar due to KPN Base’s smaller amount of preferred roaming partnership deals and a perceived network disadvantage.
KPN states that as a group it is currently a net payer of wholesale (visitor) roaming mobile charges and it would therefore expect an EBITDA margin improvement from wholesale roaming cuts all else being equal. In Figure 19 we set out our last published KPN forecasts for KPN’s three mobile divisions.
As published in recent research (European mobile roaming: A decision coming soon, dated 19 April) our most probable scenario (mandatory caps of eu45/20c outbound/inbound) would take around 3.6% off industry revenues and 7.4% off EBITDA over the first 12 months of implementation for a typical European operator generating around 10% of its mobile service revenues from roaming and 7% from EU roaming. This is equivalent to a 1.4pp decline in EBITDA margin. We compare the potential impact of retail and wholesale regulation on KPN to our published KPN forecasts.
Figure 19: KPN Mobile division forecasts
euros in millions, unless otherwise stated
KPN Mobile Neths 2005A 2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Service revenues 2,368 2,867 2,943 2,792 2,773 2,802 2,796 2,790 2,784 2,778 2,771 Growth 21.1% 2.7% -5.2% -0.7% 1.1% -0.2% -0.2% -0.2% -0.2% -0.2% Total revenues 2,483 2,980 3,059 2,902 2,866 2,894 2,889 2,883 2,878 2,872 2,867 EBITDA 928 1,092 1,162 1,074 1,060 1,071 1,069 1,067 1,065 1,063 1,061 EBITDA margin 37.4% 36.6% 38.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% Margin change -0.7pp 1.4pp -1.0pp 0.0pp 0.0pp 0.0pp 0.0pp 0.0pp 0.0pp 0.0pp
e-plus 2005A 2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Service revenues 2,461 2,698 2,929 3,164 3,330 3,458 3,562 3,654 3,736 3,811 3,878 Growth 9.6% 8.6% 8.0% 5.2% 3.8% 3.0% 2.6% 2.3% 2.0% 1.8% Total revenues 2,822 2,894 3,113 3,340 3,507 3,636 3,743 3,838 3,923 4,000 4,071 EBITDA 673 905 996 1,102 1,192 1,273 1,310 1,343 1,373 1,400 1,425 EBITDA margin 23.8% 31.3% 32.0% 33.0% 34.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 7.4pp 0.7pp 1.0pp 1.0pp 1.0pp 0.0pp 0.0pp 0.0pp 0.0pp 0.0pp
KPN Base 2005A 2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Service revenues 541 609 658 670 684 693 702 712 721 731 740 Growth 12.6% 8.0% 1.8% 2.1% 1.4% 1.4% 1.3% 1.3% 1.3% 1.3% Total revenues 548 620 669 680 693 703 712 722 732 741 751 EBITDA 204 264 247 238 229 232 235 238 241 245 248 EBITDA margin 37.2% 42.6% 37.0% 35.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 5.4pp -5.6pp -2.0pp -2.0pp 0.0pp 0.0pp 0.0pp 0.0pp 0.0pp 0.0pp Source: Company data, Credit Suisse estimates
KPN Mobile Netherlands
Stripping out the Telfort acquisition, we estimate that KPN Netherlands mobile service revenues grew around 5.5% in 2006 on an organic basis. Our 2007E and 2008E service revenue growth forecasts are 2.7% and -5.2%, respectively, or year on year reductions in organic growth of 2.8pp and 7.9pp. We therefore believe the impact of roaming (and termination rate cuts as discussed earlier in this report) is fully captured within our KPN Neths mobile forecasts.
KPN (KPN.AS) 18 of Telfort and continues to focus on lowering SACs. Our forecasts are already below this
guidance, suggesting overall our forecasts for KPN Mobile Neths are suitably conservative. e-plus
For e-plus we forecast year on year service revenue growth of 8.6% and 8.0% in 2007 and 2008, respectively, with EBITDA margins growing 0.7pp in 2007E to 32.0% and rising 1.0pp to 33% in 2008E. Given the relatively low exposure of e-plus to roaming and the company’s guidance of double-digit service revenue growth in 2007 these revenue forecasts look conservative to us. 2008E margins benefit from the network sourcing contract signed with Alcatel/Lucent. A major cut to roaming pricing could leave our margin forecast of a pick-up of 1pp in 2008E slightly at risk, but this could be offset by a beat on our revenue forecasts due to German mobile elasticity coming through.
KPN Base
Financial forecasts updated
In addition to updating the key operating trends in the existing KPN divisions we have made a number of significant changes to our model following new information provided by the company on various non-operating issues.
■ We have substantially increased our near-term cash tax charge to reflect the recent tax paper published by the company;
■ Real estate book gains now included in EBITDA at lower levels; and
■ We now assume later completion of iBasis and Tiscali Netherlands acquisitions. In our previous forecasts we assumed that the Tiscali Netherlands and iBasis transactions completed at the end of 2006 and early 2007, respectively. Now we forecast both transactions to complete at the end of H1 2007 and we therefore include financials from these two transactions from H2 2007.
We look at these three areas in more detail below. KPN to pay cash tax going forward
At its FY2006 results KPN published a tax paper setting out its updated corporate tax position. Over the period 2002—2006 the Group did not pay any cash tax due to being able to use losses carried forward, particularly from e-plus, to offset against profits over this period. The basic conclusion of the tax paper, via a complex structure, was that KPN Group expects to pay cash tax at a higher rate going in the medium-term at the group level as it no longer has sufficient losses going forward to fully set off against its future profits and e-plus losses are recaptured.
Figure 20 sets out KPN’s guidance for total group cash tax payments it expects to make over the next four years together with our old and new forecasts. KPN is guiding a FY2007E cash tax payment of €€280m and around €€700-800m in 2008E-2012E. We have now incorporated this guidance into our new KPN forecasts and so our cash tax payment for 2007E has increased by €€180m, by around €€500m in 2008E and by around €€550m in 2009. Over the next four years we now forecast an additional €€1.5bn of tax payments compared to our previously published forecasts. All of these additional tax payments impact FCF forecasts.
Figure 20: KPN: New cash tax estimates
Eu in millions, unless otherwise stated
Cash tax analysis 2007E 2008E 2009E 2010E
KPN cash tax guidance -280 -660 -720 -740
New Credit Suisse cash tax payments -276 -662 -714 -741
Old Credit Suisse cash tax payment -96 -188 -187 -571
Difference -180 -473 -528 -170
Source: Company data, Credit Suisse estimates
Longer-term our cash tax forecasts are broadly unchanged with the additional tax payment due to previous forecasts assuming higher tax would be paid in the longer-term. This does not directly impact our DCF as we continue to use a normalised cash tax charge in our DCF calculation. However, we exclude any tax credit adjustment in our DCF calculation as we discuss in the valuation section later in this report.
Real estate book gains reduced
KPN (KPN.AS) 20 generating book gains of €€600m. For 2007E the targets are €€100-200m of disposals
generating €€75-150m of book gains boosting EBITDA.
Figure 21 sets out our expectations for real estate disposals by KPN over the next four years (consisting mainly of local exchanges). Consistent with our previous forecasts we are more cautious on the timing of real estate asset disposals. However, we have increased the real estate proceeds for 2007 and reduced medium-term book gains to reflect the guidance outlined above. We now assume that the book gain on disposals is 60% whereas previously we had assumed that the full proceeds represented the book gain. These book gains do not impact our DCF as they do not represent cashflows.
Figure 21: KPN: Real estate disposals
Eu in millions, unless otherwise stated
Real estate disposals 2007E 2008E 2009E 2010E
Proceeds included in revenues New 150 150 200 200
Proceeds included in revenues Old 50 200 200 200
Change €€'m 100 -50 0 0
Book gains included in EBITDA New 90 90 120 120
Book gains included in EBITDA Old 50 200 200 200
Change €€'m 40 -110 -80 -80
Source: Credit Suisse estimates
Tiscali and iBasis acquisitions delayed
We currently expect the KPN acquisitions of Tiscali Netherlands and iBasis to both separately complete in mid-2007. Tiscali Netherlands is a Dutch unbundler serving both retail and wholesale customers—it had around 276,000 broadband subscribers and 126,000 dial-up customers in mid-2006. iBasis is a Nasdaq-listed wholesale carrier of international long distance telephone calls and a provider of retail prepaid calling services. iBasis carried more than 11 billion minutes of international VoIP traffic in 2006, according to the company.
Tiscali has a significant impact on KPN’s consumer internet growth in H2 2007E, while iBasis is a high revenue, low margin business that we expect will improve growth but slightly dilute margins in the wholesale division. According to Reuters, consensus revenues for iBasis are around US$624m (€€455m), while we estimate the company has EBITDA margins of around 5%.
As a result of these acquisitions we expect a slight decline of -0.3% (Figure 9) from KPN’s wireline division in 2007 compared to a decline of -4.0% in year on year in 2006. However, as a result of further margin pressure from the dilution from iBasis, we forecast a 1.0pp year on year decline in EBITDA margin in 2007 to 38.0%, an overall EBITDA decline of 2.6%, down from a 7.8% year on year decline in 2006.
2007E EBITDA raised 3.7%
Figure 22: KPN: Changes to Forecasts
Eu in millions, unless otherwise stated
2007E 2008E 2009E
new old ∆ (%) new old ∆ (%) new old ∆ (%)
Group Revenue (inc. real estate proceeds) 12,412 12,494 -0.7% 12,422 12,670 -2.0% 12,398 12,739 -2.7%
EBITDA (inc real estate gains) 4,983 4,808 3.7% 4,915 4,953 -0.8% 4,922 4,929 -0.1%
EBITDA margin 40.1% 38.5% 1.7pp 39.6% 39.1% 0.5pp 39.7% 38.7% 1.0pp EBIT 2,525 2,317 9.0% 2,561 2,594 -1.2% 2,606 2,610 -0.1% Net Income 1,509 1,301 16.0% 1,533 1,532 0.1% 1,576 1,556 1.3% EPS 0.80 0.69 16.6% 0.86 0.87 -1.1% 0.93 0.95 -1.9% CAPEX -1,844 -2,062 -10.5% -1,851 -1,916 -3.4% -1,801 -1,863 -3.3% Tax (cash) 276 96 186.9% 662 188 251.4% 714 187 282.8%
FCF (inc real estate proceeds) 2,346 2,044 14.8% 2,088 2,451 -14.8% 2,156 2,498 -13.7%
Wireline Revenue 6,590 6,638 -0.7% 6,518 6,497 0.3% 6,290 6,403 -1.8% EBITDA 2,506 2,378 5.4% 2,430 2,261 7.5% 2,339 2,186 7.0% EBITDA margin 38.0% 35.8% 2.2pp 37.3% 34.8% 2.5pp 37.2% 34.1% 3.0pp e-plus Revenue 3,113 3,125 -0.4% 3,340 3,298 1.3% 3,507 3,449 1.7% EBITDA 996 969 2.9% 1,102 1,088 1.3% 1,192 1,173 1.7% EBITDA margin 32.0% 31.0% 1.0pp 33.0% 33.0% 0.0pp 34.0% 34.0% 0.0pp
Dom. mobile Revenue 3,059 3,104 -1.5% 2,902 3,113 -6.8% 2,866 3,088 -7.2%
EBITDA 1,162 1,180 -1.5% 1,074 1,183 -9.2% 1,060 1,158 -8.4%
EBITDA margin 38.0% 38.0% 0.0pp 37.0% 38.0% -1.0pp 37.0% 37.5% -0.5pp
Source: Credit Suisse estimates
Group guidance
Figure 23: KPN: Credit Suisse forecasts versus guidance
2006 reported 2007 guidance Credits Suisse
Revenues and other income 12,057 Flat 12,412
EBITDA 4,837 Flat 4,983
CAPEX 1,650 1,600 - 1,800 1,844
FCF 2007 inc. real estate disposals 2,477 > 2,000 2,346 FCF 2008 inc. real estate disposals > 2,000 2,088
FCF 2009 inc. real estate disposals 2,156
Source: Company data, Credit Suisse estimates
KPN (KPN.AS) 22
2% ahead of consensus EBITDA for 2007
Figure 24: KPN: Credit Suisse versus consensus
Eu in millions, unless otherwise stated
Credit Suisse* Consensus Credit Suisse* Consensus Credit Suisse* Consensus
2007E 2007E Diff. 2008E 2008E Diff. 2009E 2009E Diff.
Group revenue 12,412 12,270 1.2% 12,422 12,321 0.8% 12,398 12,425 -0.2% Group EBITDA 4,983 4,897 1.8% 4,915 4,965 -1.0% 4,922 5,056 -2.7% Group EBIT 2,525 2,502 0.9% 2,561 2,588 -1.0% 2,606 2,698 -3.4% Pre-tax profit 2,059 2,022 1.8% 2,097 2,120 -1.1% 2,156 2,245 -4.0% Net profit 1,509 1,517 -0.6% 1,533 1,577 -2.8% 1,576 1,668 -5.5% EPS 0.80 0.80 0.4% 0.86 0.87 -0.9% 0.93 0.95 -2.0% FCF (including real estate) 2,346 2,200 6.6% 2,088 2,100 -0.6% 2,156 2,200 -2.0% CAPEX 1,844 1,800 2.5% 1,851 1,800 2.8% 1,801 1,800 0.1%
Source: KPN (consensus), Credit Suisse estimates. * Credit Suisse estimates include Tiscali Neths and iBasis acquisitions are completed in mid-2007.
Valuation: Raise price target to
€€13.0
On our new estimates, our DCF fair valuation for KPN rises to €€12.7 per share (Figure 25). Equally our full-value DCF of €€14.1 represents the value of KPN to a potential bidder for control of the company, prior to synergies. As we have noted in past research (European telecoms Q1 2007: Earnings slowing, M&A on the up, dated 2 April 2007) we see KPN as a potential bid target.Figure 25: KPN: Discounted DCF valuation of €€12.7
Eu in millions, unless otherwise stated
2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
EBITDA 4,721 4,893 4,825 4,802 4,834 4,817 4,800 4,784 4,770 4,757 4,747 Tax -645 -644 -653 -665 -680 -679 -662 -645 -645 -644 -645 Tax rate @ 29.0% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% Working Capital -142 -100 0 0 0 0 0 0 0 0 0 CAPEX -1,650 -1,844 -1,851 -1,801 -1,699 -1,642 -1,633 -1,625 -1,618 -1,612 -1,605 Unlevered FCF 2,284 2,305 2,321 2,336 2,454 2,496 2,505 2,513 2,507 2,501 2,497 OLD WACC 6.7% Perpetuity -1.0% Year 0 1 2 3 4 5 6 7 8 9 Discount factor 1.00 1.07 1.14 1.22 1.30 1.38 1.48 1.58 1.68 1.80 NPV of FCFs 2,305 2,175 2,051 2,019 1,925 1,810 1,701 1,590 1,487 1,391 NPV of f/c period FCFs 18,454 NPV of perpetuity 18,026 post-tax Total FV 36,481 WACC 6.72%
Net debt (end 2006) -9,180 Beta 1.00
NPV of additonal tax liabilities -532 NPV of real estate proceeds 803
NPV of Pension liabilities -250 Rf 4.0%
NPV of associates & minorities -120 ERP 4.0%
Equity Value 27,202 Gearing 30%
Number of shares 1,929
DCF value per share 14.1 Spread 1.0%
Discount 10% Tax rate 25.5%
Fair value per share 12.7
Source: Company data, Credit Suisse estimates. Note EBITDA used in our DCF is operating EBITDA. Terminal growth raised to minus 1% from minus 2.5%
The primary driver of the increase in our DCF valuation is a decrease in the perpetuity decline rate that we applied to the DCF calculation following a stabilisation in sector eps momentum. In our KPN DCF we assume a perpetuity decline rate of minus 1.0% compared to minus 2.5% used previously. Minus 1% is consistent with that used in our other published DCF valuations.
Adjustments for tax and Real estate disposal proceeds in DCF
We include cash proceeds from real estate disposals in our group cashflow and net debt calculation going forward. We also continue to use a normalised tax charge in our DCF calculation but no longer include around €€900m of NPV tax credits that we previously assumed, equivalent to around €€0.50 per share.
Consistent with previous research due to the unusual tax structure of KPN we included cash tax on a normalised basis using 25.5% applied to Group EBIT and made adjustments for the NPV of tax losses and the pension liability. We also included an estimated positive NPV of tax losses to set against future profits of €€867m within our calculation but we made no adjustment for the real estate proceeds.
KPN (KPN.AS) 24
of €€1bn expected to be realised in the medium-term, we have adjusted our DCF
accordingly. In the DCF we now include the NPV of additional tax liability that KPN expects to incur over the next seven years which negatively impacts our DCF valuation by €€532m (Figure 25). We also now include the NPV of real estate proceeds that we expect over the next six years which positively impacts our DCF by €€803m (Figure 25).
KPN on multiples
On multiples, KPN continues to trade broadly in-line with the sector in 2007E, but at a slight discount in 2008E on FCF yield). The company’s dividend yield of 4.6% in 2007E is also broadly in-line with the sector, but we also expect a further €€1bn buy-back programme per year going forward in line with company guidance, ensuring that KPN retains its position of sector-leading distribution.
Figure 26: KPN valuation multiples
2007E P/E 2008E P/E 2007E FCF yield 2008E FCF yield
KPN 15.4x 14.3x 7.8% 8.3%
Sector 13.7x 12.7x 8.3% 8.5%
Source: Credit Suisse estimates
Worth €€13.70 per share on LBO valuation
We have updated our LBO valuation for KPN and set out the updated calculation in Figure 27. Although we do not believe that there is any active private equity interest at present, we believe it remains a possibility if the high yield market continues to expand. In our base case we assume that KPN is acquired at the start of 2008 in an 80%/20% debt/equity deal, with e-plus and base sold 24 months later for 8x EBITDA. We also assume an exit after four years and an IRR for the investment of 20%.
